Woolworths: Investing in the long term supply chain

About the author:

Alex Lu
Author name:
By Alex Lu
Job title:
Analyst
Date posted:
25 June 2020, 7:50 AM
Sectors Covered:
Industrials

  • WOW has announced plans to develop two automated distribution centres at Moorebank, NSW for an investment of A$700-780m over four years.
  • WOW has also provided a trading update with FY20 underlying EBIT expected to be between A$3,200-3,250m. Guidance at the mid-point was 3% below our forecast but 2% above Bloomberg consensus.
  • Significant items for FY20 are expected to be ~A$591m comprising one-off supply chain transformation costs (A$176m), Endeavour Group transformation costs (A$230m) and staff remediation costs (A$185m).
  • We decrease FY20F underlying EBIT by 3% to A$3,230m.
  • Our target price falls (login to view target price) from A$35.86 and we maintain our Hold rating.

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WOW to develop two automated distribution centres at Moorebank

WOW is planning to develop an automated regional distribution centre (RDC) and a semiautomated national distribution centre (NDC) at Moorebank Logistics Park in Sydney. Construction is expected to be completed by the end of CY23 with initial benefits expected in FY25. Once complete, the facilities will replace the current distribution centres in Minchinbury, Yennora and Mulgrave (which are all over 20 years old), although temperature controlled fresh food distribution will continue to be serviced out of Minchinbury. The total cost of the project will be $1.1-1.2bn with WOW investing between A$700-780m in technology and fit-out and Qube Holdings (QUB) committing A$420-460m on warehouse construction. Given the long-dated nature of the project, we do not factor in any benefits at this stage despite management targeting a significant reduction in supply chain costs over time and strong returns (in the double-digits).

FY20 EBIT guidance was below our expectations

With the exception of Hotels, 4Q20 YTD sales were strong with growth in all divisions well above our expectations. Australian Food sales rose 8.6% (Morgans +5.9%), NZ Food (NZD) increased 15.1% (Morgans +7.7%), Big W jumped 27.8% (Morgans +6.5%) and Endeavour Drinks grew 21.4% (Morgans +3.7%). Despite stronger-than-expected sales growth, FY20 EBIT guidance of A$3,200-3,250m was 3% lower than our forecast at the midpoint. Management said incremental COVID-19 related costs during the quarter was towards the higher end of the A$220-275m previously targeted.

Changes to earnings forecasts

We decrease FY20F/FY21F underlying EBIT by 3%/2% to A$3,230m/A$3,260m.

Resilient business but priced in

While WOW should continue to benefit from consumers spending more time eating and drinking at home, trading on 28.2x FY21F PE and 2.6% yield we see the stock as fully valued despite the current favourable operating environment. Nonetheless, we expect the stock to remain resilient should markets become more volatile over the next few months. Hold rating maintained.

More information

Morgans clients can login to view our detailed report and revised share price target for Woolworths. Alternatively, please contact your Morgans adviser or nearest Morgans office for access.

Disclaimer: The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual's relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents (“Morgans”) do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so.

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